SolarCity offers new way to invest in solar power

By Jonathan Fahey Associated Press

Posted:
01/15/2014 10:01:38 AM PST

Updated:
01/15/2014 02:03:09 PM PST

NEW YORK -- Solar panel installer SolarCity is turning to retail investors for cash. The company said Wednesday that it plans to sell securities directly to individuals and others interested in investing in its rooftop solar systems.

The move is a novel way for the San Mateo company to finance the enormous cost of installing panels on thousands of roofs -- a typical residential system costs $25,000 -- while appealing to retail investors who are on the hunt for better rates of return than they can find in savings accounts and government bonds.

The securities will likely be similar to bonds or certificates of deposit. But instead of being backed by SolarCity, they would be backed by hundreds or thousands of contracts with rooftop solar customers. Wall Street has long created such products, called securitizations, which bundle assets such as mortgages or other loans into securities that can then be bought and sold.

Now SolarCity wants to offer its own version through its website.

SolarCity Corp. CEO Lyndon Rive said in an interview that he expects the company will offer several types of products that investors could hold for different lengths of time, or even trade. He expects eventually to raise "billions" of dollars this way.

Advertisement

"We are constantly asked, 'When are you coming to my state?' or 'When are you coming to our country?' People everywhere want to participate in this transformation," says Rive. "With our investment platform, even if we can't put panels on everyone's roof today, we can still give many of them an opportunity to participate in solar's growth."

SolarCity said Wednesday that it has purchased privately held financial technology company Common Assets to provide the investment platform. SolarCity shares rose $2.85 or 4.4 percent, to $68.40 in trading Wednesday afternoon.

SolarCity pays to install and maintain rooftop solar systems for homes or businesses in exchange for monthly payments for the power that the panels produce. The company has raised money to pay for these systems several different ways.

Mostly, SolarCity has turned to big investors, such as Google (GOOG), Bank of America or U.S. Bancorp, to create large funds that SolarCity has used to finance systems. These deals are set up in a way so that the investing company reaps the renewable energy tax credits generated by the projects. But these deals, called tax-equity deals, are relatively expensive to structure and only a small number of companies appear interested.

Late last year, SolarCity raised $54 million by creating a series of notes backed by solar power contracts and selling them to institutional investors. The notes were rated BBB+ by Standard & Poor's, a low investment-grade rating. The notes pay 4.8 percent and mature in 2026.

Common Assets CEO Tim Newell, who has joined SolarCity to run the financial products, says that while SolarCity has successfully raised money in more traditional ways, a more diverse stream of funding could lower the company's overall cost of capital.

For investors, it won't be as safe as betting that the sun will come up again tomorrow. If enough customers don't pay, if the panels' performance degrades more quickly than expected over time, or if power prices go out of whack the investments could go south.

Nathan Kubik, a principal at the financial advisory firm Carnick & Kubik, said he could see a place for this kind of investment in his clients' portfolios, depending on how the securities are ultimately structured -- the interest rate, the term, how the principal is paid back, and the credit quality of the solar power contracts.

He is concerned, however, that there might not be a secondary market for the securities big enough to allow investors to easily and cheaply sell them if need be. "If these are illiquid, there are better options out there," he said.

The specific financial products -- and the risks -- will be unveiled and offered likely in the first half of the year, Rive said. Until then, SolarCity won't comment on how exactly the products will be structured or their specific risks. But in explaining past deals, SolarCity has argued that an investment backed by many small solar installations offers more safety than an investment backed by a single asset that could be more vulnerable to a disaster or dramatic change in markets.

Rive also suggested that some of the company's financial offerings may include guarantees on investors' principal, and will be able to be traded.

"Once this gains momentum, consumers will love it and then over time we'll deploy billions," he said.